Onus is on the Bulls
Investors came back from the holidays in a selling mood last week, driving the indexes and leading stocks sharply lower. And while everyone hopes that this is the final push lower before the bulls truly re-take control, the fact is nobody knows what the future holds. What we do know is that the sellers are punishing most stocks, and the narrow list of leaders that were holding up are now going along for the ride. Conclusion: You should be playing defense, mostly sitting on the sideline and waiting for the storm to pass. As for new buying, a small buy or two is still OK, especially in areas that are actually pushing ahead during this down market. This week’s Top Ten, for instance, features many commodity-related names to examine. Our favorite is Barrick Gold (ABX), which spiked to new peaks last week on its biggest volume in years, as institutions anticipate more good times for gold prices as the Fed cuts rates and the U.S. dollar sinks. It’s worth a nibble here.
| Stock Name | Price | ||
|---|---|---|---|
| ABX (ABX) | 0.00 | ||
| ADM (ADM) | 0.00 | ||
| ATW (ATW) | 0.00 | ||
| BMRN (BMRN) | 0.00 | ||
| CMED (CMED) | 0.00 | ||
| CTCM (CTCM) | 0.00 | ||
| FCN (FCN) | 0.00 | ||
| MON (MON) | 0.00 | ||
| MTL (MTL) | 0.00 | ||
| UTHR (UTHR) | 0.00 |
(ABX)
Why the Strength
The price of gold is in a solid uptrend, and that’s helping all gold stocks, including Barrick Gold. The company, based in Canada, is one of the largest gold producers in the world, with projects in Nevada, Chile, Tanzania, Alaska, South Africa, Russia and Pakistan, to name a few. While the fundamental numbers in the table below don’t get the heart racing, most gold stocks simply trade up and down with the price of gold, and for good reason – cash costs for mining activities are holding relatively steady, so as spot and futures prices increase, the extra money will fall to the firm’s bottom line. Adding to Barrick’s appeal is its size (institutions want to own big, liquid names in this industry, not small speculative outfits) and a strong management team, which has a history of sound acquisitions and cost containment. All told, we believe Barrick has a bright future as gold heads toward $1000 an ounce.
Technical Analysis
ABX wasn’t an exciting performer for a few years, but we believe the stock’s character has changed in recent months. First came a powerful breakout of a long trading range in early September, pushing ABX to multi-year peaks. The retreat during November and much of December was reasonable, and now the stock is surging to new peaks – last week’s upside volume, in fact, was the largest in years! That tells us any retreat from here, if there is one, should be mild. Translation: Buy a little around here.
ABX Weekly Chart
ABX Daily Chart
(ADM)
Why the Strength
Archer Daniels Midland is one of the biggest agricultural companies in the world; it processes soybeans, corn, wheat, cocoa and more, turning them into soymeal, oil, corn sweeteners, flour, cocoa and chocolate. Revenues top $47 billion per year and are growing, yet the company’s market capitalization is just $29 billion. Why? Well, there were some tough times in the industry a few years back, and over a decade ago the company was found guilty of price fixing; it paid a fine of $100 million. But that’s ancient history. And today there’s little incentive to cheat; prices for agricultural commodities are on the rise around the world, as demand grows faster than supply. And then there’s ethanol! ADM is the largest producer of ethanol in the U.S. … as well as a major producer of biodiesel fuels. It’s even involved in carbon sequestration! Put it all together, and ADM is in the catbird seat. Revenue growth has accelerated in recent quarters. Earnings estimates have been raised. And there’s a 1% annual dividend, to boot. We like it.
Technical Analysis
Technically, there’s a lot to like here, too. ADM peaked at 47 back in the second week of May 2006, and then corrected to a double bottom at 30. Recent months have seen the stock surge back toward that old high, and two weeks ago it made a break for a new high, but couldn’t hold onto it. Still, the selling pressures since than have been non-existent – which is very impressive considering the market – so we think it will break through eventually. You could buy a little here, or wait for a deeper correction.
ADM Weekly Chart
ADM Daily Chart
(ATW)
Why the Strength
Ever-rising demand for crude oil is pushing producers out to sea, as events ranging from political turmoil in Africa to breakneck development in China combine to validate the high price of offshore extraction. Atwood is a prime beneficiary, as it leases and manages its fleet of offshore rigs in places like the Gulf of Mexico, the West African coast, Southeast Asia and the Black Sea. The company owns and operates eight drilling units and is constructing a ninth, to be delivered later this year. Last week, the company won a contract to build a deepwater rig for Chevron Australia, to be delivered in 2011. What will happen to the oil market before then is anyone’s guess, but Atwood’s multi-year contracts – with fixed day rates for rig operation and maintenance – guarantee this company a steady stream of income regardless.
Technical Analysis
ATW is in a long strong uptrend, but we think it has further to run, in part because it recently built a solid 13-week base at 80. Since launching out of that base in the last week of November, the stock has gained 25%, and the odds say more is likely. Last week the stock sat tight at 100, despite the market’s weakness, and it could sit for longer, waiting for the 25-day moving average (now at 93) to catch up. Eventually, more upside progress is expected.
ATW Weekly Chart
ATW Daily Chart
(BMRN)
Why the Strength
BioMarin resembles a typical promising pharmaceutical in a lot of ways: it has a couple groundbreaking drugs on the market, more in development or clinical trials, and partnerships with giants like Merck and Genzyme. But this company distinguishes itself from the already distinguished pack in one important way; it has a savvy business plan that practically guarantees profits. The company develops drugs to address “unmet medical needs,” meaning its products face no competition, once approved, for the treatment of rare but serious genetic diseases like mucopolysaccharidosis and phenylketonuria (a genetic disorder that can cause mental retardation). Investors recognize the beauty of this early-bird monopolization strategy; FDA approval last month for a new phenylketonuria drug called Kuvan boosted the stock over 20% in one day.
Technical Analysis
BMRN came public in 1999 at 12, peaked the next year (along with the entire market) at 41, and fell to 4 in 2002. Its current uptrend began in late 2004 when the stock was trading at 4, but accelerated in late 2007, as savvy insiders speculated that FDA approval would soon arrive. And on December 13, they were rewarded, as the approval of Kuvan was announced and the stock jumped from 30 to 37 in one day. Three weeks later, the stock has consolidated its position on top of 35 and is climbing out to new highs. It’s tempting to tell you to buy a little here, but we’d prefer you assume the lower risk that comes from buying on a correction.
BMRN Weekly Chart
BMRN Daily Chart
(CMED)
Why the Strength
China Medical Technologies (C-Med), making its fifth Top Ten appearance in this issue, has always been an intriguing mix of proven conventional products and one high-potential experimental device. The company’s diagnostic kits use chemoluminescence to detect thyroid abnormalities, diabetes and other conditions. These kits provide steady income, especially since the company’s late-November takeover of Beijing Bio-Ekon Biotechnology, which enlarges C-Med’s footprint in sales to hospitals. As always, the wild card in weighing future prospects for C-Med is its High Intensity Focused Ultrasound (HIFU) machine, a computer-guided system that uses ultrasound to kill tumors inside the body without anesthesia, incisions or pain. The HIFU machine is in clinical trials in Washington state for use against a limited range of tumors, and any good news from those trials could have an explosive effect on C-Med’s stock. In the meantime, the company’s 72% increase in sales (partly from the Bio-Ekon takeover) and 48.9% after-tax profit margin make it look good even without HIFU. Institutional sponsorship has also started to inch up. A small dividend puts a bow on a tidy package.
Technical Analysis
CMED has been beating the market since launching off of a base at 24 back in June. More recently, we see a three-month consolidation phase (while the broad market was sinking) that kept the stock trading in a range from 35 to 45. Then two days of high-volume buying last week pushed CMED out to new all-time highs before the stock succumbed to Friday’s poisonous market environment. It looks like a good buy anywhere under 47, although a dip to its 25-day moving average at 44 is a real possibility.
CMED Weekly Chart
CMED Daily Chart
(CTCM)
Why the Strength
CTC Media is a Russian television network with two channels of entertainment programming. The CTC Network is targeted at viewers between ages 6 and 54 and is carried on about 330 stations and local cable operations. The Domashny (Home) network is aimed at women between 25 and 60 and runs on about 210 stations. CTC Network is available to about 100 million people, while Domashny reaches a potential 58 million viewers. The company was founded in Moscow in 1994, and really took off in 2006 when its mega-hit show Born Not Pretty sent advertising revenues through the roof. Since then, revenue and earnings growth have slowed (including a 17% drop in earnings in Q2 2007), but the company’s move into production via the acquisition of two production houses has renewed investors’ interest. The prospect of vertical integration with recurring income from licensing self-produced programs is an attractive one. As Russia prospers, CTC should grow right along with it.
Technical Analysis
CTCM, making its first Top Ten appearance in this issue, came public in May 2006, and climbed from 14 to 29 on the strength of rapidly rising earnings, then corrected back to 19 in February 2007 when earnings leveled out. The stock made another run to a new high in July, but slipped back to 20 in the global mid-year correction. CTCM has just run out to a new all-time high at 31 on good volume. We think you can buy some here, although a dip to its old resistance level at 29 is possible. Also note the stock is thinly traded, so sharp moves up or down are likely.
CTCM Weekly Chart
CTCM Daily Chart
(FCN)
Why the Strength
FTI Consulting thrives on trouble and change, so today business at the company is very good! In the third quarter, its Forensic and Litigation Consulting division brought in $54.6 million, up 17% from the year before. Its Technology division brought in $44.8 million, up 49% from the year before. Its Corporate Finance and Restructuring Consulting division brought in $62.9 million, up 24% from the year before. (That’s the division that loves the turmoil in global credit markets, giant automotive companies, subprime mortgages, housing, building materials, healthcare and more.) Its Economic Consulting division brought in $45.9 million, up 33%, mainly by serving the securities and financial services industry. And the new Strategic and Financial Communications division saw revenue of $45.1 million, much of it from serving firms in Europe and Asia. Going forward, the company expects continued growth from all divisions, and earnings estimates have been raised in anticipation of that. In short, we like it.
Technical Analysis
FCN last appeared in Cabot Top Ten in August, and if you bought then and simply held, you’ve beaten the market. The stock has seldom been hot but it is relatively consistent in its ascent. And it returns to its 50-day moving average frequently enough to make that a target of your buying. Today that 50-day average is nearing 58, and a dip of another point or two would bring the opportunity we expect.
FCN Weekly Chart
FCN Daily Chart
(MON)
Why the Strength
Monsanto is a leading producer of corn and other crop seeds, specializing in the genetically engineered variety, which are resistant to many herbicides and repel bugs. Demand for these seeds is going through the roof – the company’s quarterly report last week showed that revenues were up 36% and earnings soared 171%, the fastest growth in years. And management expects the good times to continue, stating that the need for big row crops (corn, soy, wheat) is as great as it’s ever been, thanks to the impact of corn-based ethanol and demand from emerging economies. Thus, the good times should continue, although most investors are already pricing that in – the P/E ratio of 53 is extended compared to the firm’s expected 25% to 30% earnings growth. Overall, there’s no doubt Monsanto is a leader, but if you buy some, keep an eye on it.
Technical Analysis
MON has enjoyed an extremely big advance the past few years, rising more than ten-fold during that time. And since the market’s August low, the stock has been one of a handful of big-cap leaders, doubling in price. Normally, that would be enough to indicate that a correction is in the offing, but the stock reacted well to last week’s earnings report, and the agricultural sector as a whole continues to outperform the market. Our advice: Buy a little on weakness, and then put a stop-loss in the 100 to 105 area.
MON Weekly Chart
MON Daily Chart
(MTL)
Why the Strength
Mining and steel companies like Mechel, making its second Top Ten appearance, are easy to understand. The company mines coal, iron ore and nickel and produces steel and steel products. More than half of sales are made inside Russia, and a bit more than a quarter come from Europe. Mechel’s growth has come both organically and through acquisition. The most recent news has been the commissioning of a new plant to produce high-tensile wire for use in reinforcing cables. The company also reported in mid-December that it had acquired 49% of a Bulgarian coal-fired power plant, a naturally synergistic move for a company with a large supply of coal. Mechel is large, with aggressive management, and is benefiting from the stable business environment provided by Vladimir Putin’s administration and confirmed by the election of his hand-picked successor. Revenues and earnings have been growing strongly since turning up in 2006 and institutional investors are signing on in increasing numbers. With a relatively low P/E ratio of 15 and a substantial 1.9% dividend, Mechel looks attractive.
Technical Analysis
MTL has been rising strongly since it bottomed in May 2006 at 19. It recently ran into resistance at 100, and is now sitting right on its 25-day moving average. It may, in fact, need to consolidate at this level for a while. But the odds favor higher prices over time, and a dip below 90 (the stock’s 50-day moving average is at 88) would present a tempting buying opportunity.
MTL Weekly Chart
MTL Daily Chart
(UTHR)
Why the Strength
It’s every biotech firm’s dream to develop a couple of blockbuster drugs, and it appears that United Therapeutics is on the verge of doing just that. Its Remodulin treatment for hypertension has been on the market for a while and is raking in good money; revenue growth is now accelerating, while earnings push generally higher. But the reason this stock has a market cap north of $2 billion (vs. $200 million in annual revenue) is thanks to the potential of Viveta, an inhaled treatment for high blood pressure. Two months ago, United released the results of a Viveta trial, and they were spectacular – patients with severe pulmonary arterial hypertension (read: continuously high blood pressure in the pulmonary artery) were able to walk 65% further after twelve weeks than those taking the placebo. The drug is likely to be approved in the quarters to come, and it should bring an avalanche of money United’s way. It’s a great story.
Technical Analysis
The news surrounding Viveta, combined with a blowout third-quarter earnings report due to great Remodulin sales, caused UTHR to gap out of a two-year base back in November. And since then, despite the market’s troubles, the stock has worked on a flat, relatively tight basing structure. If the market continues to head lower, UTHR could break down, but the action so far has been pristine. If you’re game, you could buy a little here, keep a tight stop around 95, and look to add a few shares on a decisive break above 110.